Hero Honda Motors - Disappointing 1HFY11, Sell: Anand Rathi

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Hero Honda Motors
Disappointing 1HFY11, lower estimates; maintain Sell
 Operating performance disappoints. Hero Honda Motors’
(HHML) results were disappointing for the second successive
quarter, with the company registering lower-than-expected
operating performance. We maintain our Sell recommendation.


 Subdued volume growth. The 2QFY11 net sales growth of
12.1% yoy was fuelled by 8.7% volume growth and 3.2% better
realisations, which was in line with expectations. EBITDA margin
during the quarter was 13.4%, 60bp lower qoq and 490bp lower
yoy, on account of the higher raw material cost. As a result, profit
for the quarter declined 15.3% yoy.

 Pressures to mount. We expect HHML to be pressured due to: i)
limited potential of incremental benefits from higher production
at the Haridwar plant, ii) margin pressure sustaining, iii)
competition resulting in yoy slide in market share, and iv)
uncertainty regarding future structure of the HHML joint venture.

 Lower estimates; introduce FY13e. We lower our FY11e
earnings 13% (and by 13.5% for FY12) on expectation of lower
EBITDA margin ahead. Also, we introduce our FY13e EPS at
`139.4 (15.3% yoy rise).

 Valuation and risks. We lower our target price to `1,783 from
`1,800 based on 13.5x FY12e core EPS (~15% discount to the
past five-year core PE average). We maintain Sell. Risks: Betterthan-
expected demand and decline in commodity prices.